We like to give issues of The 5 a theme once in a while. You might recall our “commodity issue” last week or “the everyman’s issue” earlier this month. We’ve got a theme for you today, but it doesn’t exactly roll of the tongue. Oh well, it needs to happen:

Welcome to a “hot-button issues we can no longer avoid” edition of The 5 Min. Forecast.
First up, climate change. We’d love nothing more than to leave this debate to Al Gore and Wall Street Journal editorialists. And for the most part, we will. But as you know, the House passed their climate change bill late Friday, and the entire energy industry is targeted for reform. Here’s the rundown in case you didn’t get to read its 1,200 pages — as all of our representatives in Washington surely did:

• Greenhouse gasses must be cut 17% by 2020 and 80% by 2050. Emissions from factories, power plants, refineries and energy distributors will make up most of the cut. The infamous cow fart emission cap was taken out
• A cap-and-trade system will cut these emissions. The government will issue a limited number of 1-ton permits each year, which companies will have to obtain if they wish to emit greenhouse gasses. Each year, the government will issue fewer permits. Thus, companies will have to clean up operations, use more green alternatives or invest money in “offset projects” — like a paper mill planting more trees
• 12% of power from electric utility companies must be from renewable resources by 2020
• New office buildings must be 30% more efficient by 2012
• The Congressional Budget Office expects the current rendition of this bill to cost U.S. households $175 a year. We’ve heard alternative estimates as high as $2,000.

“Rome is burning,” says our energy man Byron King. “Well, maybe not. This could alter our culture’s use of the metaphor. Burning Rome? Sorry, not without your carbon permit.

“After a millennium of merely tossing sticks and logs into burn pits, the Industrial Revolution was when mankind finally figured out how to use ancient forms of stored energy — coal, oil and natural gas — to build and maintain a vast manufacturing economy. In consequence of the carbon-fuelled revolution in productivity, the earth went from a population of about a billion, to near seven billion today.

“And now, per the House bill, our government has started on the way to reversing THAT Industrial Revolution. The new Big Idea is that there will be another, ‘carbon neutral’ Industrial Revolution, based on harnessing solar, wind and geothermal energy. Carbon is sooooo 20th century. Carbon neutral is the new black.

“The House legislation is 1,200 pages of special deals and giveaways, grafted onto a Soviet-style 40-Year Plan. (I should note that even the Soviets, for all their ambitions, worked in 5-year plans.) Cap and trade will be the largest tax increase in U.S. history. It’s the triumph of the tax raisers, central planners and controllers, and an arrow into the chest cavity of free market capitalism.

“So with higher energy costs throughout the economy, plus an immense new level of state control over economic activity, can the U.S. — at least as we know it — make the transition to that mythical carbon-neutral energy economy? My hunch is no. Cap and trade will breed more problems, which will lead to more taxes and even more regulations. There’s never just one cockroach. And while we live through the consequences of what’s going to happen, there will be a lot of misallocation of resources throughout the economy.

“I hope your subscription is current to Outstanding Investments, because that’s where I’ll be showing you how to invest your way around the consequences of our national hubris.”
Oil futures haven’t been fazed by the climate change bill.After all, it still needs to slither its way through the slimy halls of the Senate. Oil’s up $2 today, to $71 a barrel.
Unrest in Iran could accelerate a global energy breakthrough, reports our tech analyst Patrick Cox. We’ve been avoiding Iran’s issues lately as well. While fascinating, and certainly dynamic, it’s just not our beat… or so we thought:

“The central tension in the Iranian situation is the nuclear issue,” Patrick tells us. “That country’s autocracy is dead set on getting nuclear capabilities — and not without reason. Iran does need nuclear energy to promote economic growth. Contrary to popular wisdom, the country’s petroleum is not a good source of electrical power.

“The problem, of course, is that the technology being pursued by Iran can also be used to create nuclear weapons. This, naturally, worries a lot of people who fear the regime’s threats to destroy both Israel and America might actually lead to war. Many Iranians, in fact, are unhappy about the nuclear plans of the country’s rulers. Israel and Iran’s Sunni Arab neighbors are also plainly anxious.

“Iran’s relationships with the rest of the world would be an order of magnitude less stressful if it were not producing weaponizable fuels. This is why my sources tell me that thorium is enjoying a significant increase in interest lately. As we’ve discussed, thorium is not only a superior nuclear fuel from the technical and economic perspectives, but it solves the proliferation problem because it produces no waste products useful in weapons.

“Like every other sector, energy development has taken a big hit during this downturn… Ultimately, I believe, the superior nuclear technology will win out. In some ways, the financial meltdown has made pragmatism even more important than it was when tax revenues were flowing far more freely.”

Want to learn about Patrick’s favorite thorium play, along with the rest of his breakthrough technology picks? Check out Breakthrough Technology Alert.
“Iran has a bigger place in the global economy than most people know,” adds Chris Mayer

“The first thing that I don’t think many people appreciate is how big the country is. The population of Iran is 66 million. That makes it the 19th most populous country on the planet — more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth.

“Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Take a look the next chart, which shows the sharp growth in trade:

“Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

“Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. As Ilan Berman notes in a recent issue of the Far Eastern Economic Review: ‘Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing’s energy plans.’

“No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field. I am sure the Chinese are watching what happens in Iran with great interest. It makes for a complicated political situation.”
The world’s rank and file of millionaires are in for quite a shake-up. Here’s some takeaways from our latest read: The 2009 World Wealth Report, by Merrill Lynch and Capgemini.

First, the number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world’s millionaire population, now at just 8.6 million “high net worth individuals (HNWI),” as Merrill puts it. The total worth of the world’s wealthy fell about $7 trillion last year, to $32.8 trillion.

North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. Of course, we’re still at the top… but for how long? Check out this chart:

We should hedge this chart a bit: First, it’s from Merrill Lynch… need we say more? They use some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years is the same kind of Ivy League MBA thinking that caused Merrill’s collapse and subsequent fire sale to Bank of America.

That being said, we wouldn’t be surprised if their forecast comes true. Simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans are millionaires. Only one in about 1,700 Asians can say the same.

(This would be one of many reasons we’re burning the midnight oil on a BRIC report, just for you… stay tuned.)
Five banks failed this weekend, bringing the 2009 running total to 45. The five failures this weekend cost the FDIC another $264 million.

And what’s up with Georgia? Two of the weekend’s failures were there, bringing the Peach State up to 14 for the year — the most of any state. We’ve been told the lending market in Atlanta was hit exceptionally hard by the housing bust… if you’re from the area, let us know what’s going on.
Stocks are cautiously rising today after their first weekly loss since early May. The S&P 500 fell 2.6% last week, but as we write, it’s up about 1%.
The dollar index is right were we left it on Friday, just under 80.
Another sign of the times: Warren Buffett’s annual charity lunch sold Friday for 20% less than 2008’s price. Last year, a Chinese fund manager proudly bought the lunch for $2.1 million. This year, a currently anonymous Buffett disciple picked it up for $1.68 million.
No economic data to speak of today, but the next three days of this shortened trading week are jampacked with juicy numbers. We’ll see new consumer confidence and Case/Shiller home price index details tomorrow. Then there’s ADP’s employment count, construction spending, the ISM manufacturing index, pending home sales and auto sales on Wednesday. Then Thursday — the infamous Labor Department jobs report, where the unemployment rate is expected to reach 9.6%.

All interesting stuff… stick around — we’ll keep you in the loop.
Last today, one more issue we love to avoid: Bernie Madoff. He was sentenced to 150 years in jail today. CNBC spent most of their morning debating whether the 71-year-old should get 25, 50, 100 or 150 years in prison and recounting the sob stories of his victims… those fools whose mothers never told them, “Don’t put all your eggs in one basket.”

Our take: Why not park the cameras outside the SEC, instead of the ninth-floor courtroom in lower Manhattan? Where’s the outrage toward a government arm that scams us all — our tax dollars in exchange for financial security… the kind that routinely arrives too little, too late. Not only is there no blood in streets in front of the SEC, but they’re on track to get more funding… crazy.

Source: The Hot Button Issue: Climate Change, Iran, Madoff and More!

In this week’s Outside the Box we continue with what I mentioned a few weeks ago: agricultural needs are going to be a new and important force in the world and when coupled with energy may shift the balance of power in the world in strange a different ways.

When, as Niels points out, Afghanistan poppy farmers are shifting to wheat farming, the world is truly a different place. I think you will find the research he has done to be truly worth a few minutes of your thinking time.

And as a preface, I was reminded a little while ago that a Financial Times headline story last Friday mentioned that China is buying African farmland and building massive amounts of railroads and infrastructure to get grains to the market. I have long been bullish on African farmland. This week’s OTB will tell you why.

“There is nothing so disastrous as a rational investment policy in an irrational world,” John Maynard Keynes. You just know that something is astray when Afghan poppy growers begin to switch from opium to wheat.

According to the Independent newspaper here in the UK, that’s exactly what is now happening. I have no desire to enter into a pound for pound risk/reward analysis of producing wheat versus opium. However, the consequences of the rapid rise in energy and agricultural commodity prices are far reaching and perhaps not as well understood as they should be. That is the content of this month’s letter.

The Silent Tsunami

My story begins with Al Gore. While most of us lulled ourselves into the belief that he was onto something when he tried to convince us that global warming (or climate change, as I prefer to call it) was the most formidable challenge facing this planet, a silent tsunami¹, also known as the global food crisis, began to develop and is now threatening to undermine global political and economic stability, the latter of which has been key to the benign financial markets we have all benefited from in recent years.

According to the World Bank, just over 1 billion people live on one dollar or less per day. People in the poorest countries in the world spend 80% of their income on food. So when you and I have hardly noticed that the bread we pick up from the local bakery has doubled in price over the past year, it is because only 10-15% of our budget is spent on food items². In many emerging economies the number is much higher. Chinese consumers spend 28% of their income on food. In India it is 33%. If you want to know how much it is in your country, go to:

http://www.ers.usda.gov/briefing/cpifoodandexpenditures/data/2006table97.htm.

There are three food staples in the world today which dwarf all other food ingredients in terms of importance. They are (in alphabetical order) corn, rice and wheat. As you can see from chart 1 below, they have all experienced rapid price appreciation since last summer. What is it that has driven this price explosion and what does it mean to financial markets? As with most things in life, there is no simple explanation; a number of factors have conspired to create a situation which is exceptional but also destabilising and hence dangerous.

It Is The Bio-Fuel Policy Stupid!

The explanation given by most commentators is the bio-fuel policy currently being pursued by the Bush administration in Washington. The policy is driven by a desire to unlock the United States from its rising dependence on imported crude oil. The problem, as Bush and his government have been slow to recognise, is the stupidity of the policy in its current form. Let’s back that claim up with some hard facts.

In the United States, corn (better known as maize over there) is the primary ingredient in ethanol production although wheat and soybeans are also used. According to a recent UN report, it takes 232 kg of corn to fill an average 50 litre car tank with ethanol – enough corn to feed a child for an entire year. It is estimated that almost 20% of total US corn production will go towards ethanol this year and the number is set to rise to 45% by 2015³.

The problem with corn is that it is low on carbon hydrates, which is where the energy comes from. Instead, American ethanol producers rely heavily on fertilisers with the energy being extracted from the nitrogen in the fertiliser. This is an inefficient and very costly approach – in particular in an environment of rising energy prices because crude oil and/or natural gas are major ingredients in fertiliser production. 33,000 cubic feet of natural gas are required to produce just 1 ton of ammonia!

So what does all this mean? According to estimates from Goldman Sachs, the cost of ethanol from corn is now over $80 per barrel, it is about $145 from wheat and over $230 from soybeans. Other countries recognised this problem a long time ago and use crops with higher carbon hydrate content. In the Philippines they use coconut oil and the Brazilians use sugar cane. Goldman reckons that the cost of one barrel of ethanol based on sugar cane is about $35. So why not import sugar cane from Brazil instead of using corn? One simple answer: Brazilian farmers do not vote at American elections. Idaho farmers do.

Are Investors To Blame?

There is no question that the US bio-fuel policy which, by the way, is now being copied in other parts of the world including the EU, has to take its share of the blame. But it is by no means the only reason for the food crisis. The next culprit on my list is our very own industry – investors of all kinds. In recent years there has been rising demand for commodity-linked investment products from investors all over the world. Pension funds, hedge funds, mutual funds and private investors have all allocated more and more to commodities and, in recent months, demand growth has been explosive, as is evident from chart 2 below. It is estimated that the aggregate value of commodity-linked index funds now exceeds $200 billion, a very significant number in a not very large market.